Exports post rapid growth but imports grow faster…

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The February Trade data points at some distinct positives. Firstly, the Exports have shown a sharp growth in the month of February 2017 and are growing at its fastest clip in the last few months. A large part of this growth has been driven by sectors that were specifically identified for an export push. That means the trade policies are broadly on the right track. The only worry on the merchandise trade front could be that imports are growing at a much a faster clip compared to exports. With our dependence on oil imports, the vulnerability to higher oil prices can be quite acute on the balance of trade. That is something that India needs to watch out for.

Exports deliver healthy growth in February 2017…

Exports for the month of February recorded a 17.48% growth to $24.49 billion. This is the 6th consecutive month of export growth since September 2016 and the February number largely reveals the impact of the remonetization that began in January 2017. Demonetization had taken away the sting from exports of goods and services and the rapid growth in merchandise exports seems to be back this month. The redeeming feature of this export figure was the 20.15% growth in non-petroleum & non-G&J exports. That is an indication of a genuine turnaround in exports performance in sectors identified by the government as a thrust area under the “Make in India” program. For the first 11 months of the financial year (Apr-Feb) exports stood at $245.15 billion.

As per the WTO statistics, India’s exports growth is higher than peers but it is on a much lower base. While China has seen negative growth in exports, the month of February saw positive growth in exports for the US, EU and Japan. In fact, Japan grew exports by 10.87% largely aided by a weak Yen. The lesson for India may be that it needs to let the INR to weaken to give a bigger boost to exports. The INR was already overpriced as per REER when it was at the $68 level. With the INR appreciating to the 65.8/$ levels, this overvaluation of the INR would have only worsened. That ought to be the focus of the Commerce Ministry to give a substantive thrust to exports.

Imports have growth at a much faster clip in February 2017…

Merchandise imports for the month of February 2017 came in at $33.39 billion, a growth of 21.76% in dollar terms. The sharp rise in imports was largely accounted for by crude oil imports. For the month of February, crude oil imports were up by 60% at $7.68 billion. This sharp growth was largely because the price of crude had bottomed out at around $30/bbl in February 2016 and it is up over 70% from the lows of Feb 2016. The sharp rise in crude prices have accounted for the rise in the oil import bill. Even non-oil imports at $25.71 billion were up by 13.7% in the month of February. The demand for gold is estimated to have doubled in the month of February 2017 and that may have pushed up the non-oil import bill sharply. The Indian government needs to be cautious of rising gold imports as it implies that precious forex resources are being used up for non-productive imports.

Cumulative imports for the first 11 months of the fiscal year (Apr-Feb) were at $341 billion. That means we could end the full financial year 2016-17 with a total import bill of around $375 billion. With the forex reserves currently sufficient to cover over 11½ months of imports, the situation is comfortable and almost at par with the situation in other BRICS nations.

Merchandise deficit is sticky and services trade is not growing…

The merchandise trade deficit for the month of February is at $8.9 billion which is slightly better than the $10 billion deficit that we were consistently hitting in the last few months. For the first 11 months, the merchandise trade deficit has come in at $95 billion and we could end the full fiscal year with a merchandise deficit of around $105 billion. This is far lower than the peak trade deficit levels that we had touched in the 2011-13 period. The big challenge for the government will be to give a consistent push to exports. That is where the currency policy will be critical. A policy towards weakening the INR would work better for the exporters and that policy has been very successfully followed by Japan in the last few months. India has focused overly on the sustainability of capital flows, which predicates on a strong rupee. However, the government may have to give greater precedence to the interests of the exporters and let the currency find its natural level.

The deficit also needs to be looked in terms of the large overall deficit after considering the trade in services. While India has traditionally run a deficit in merchandise trade and has also run a surplus in services trade. Services trade data is typically disclosed with a 1-month time lag and hence may not be exactly comparable. However, it is largely indicative. For Jan 2017, the services exports were at $13.57 billion while services imports were at $8.41 billion leaving a services trade surplus for the month of $5.16 billion. If this surplus of $5.16 billion on services gets adjusted against the deficit on merchandise of $8.9 billion, it leaves a net deficit of $3.74 billion on the current account for the month of February. The RBI and the government need to urgently take a re-look at their rupee policy to boost exports and bring this net deficit figure closer to zero!

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